One Dollar a Day Not Enough for Redbox to Keep Lawsuits Away

Although modern technology may never solve the debate between whether to watch a movie at the theater or to watch it as a rental, technology has made it considerably easier to obtain the rental of your choice at an affordable price. While there are obviously pros and cons to both options, one of the biggest cons with renting a movie used to be the considerable amount of time, effort, and money (i.e., driving to the store, perusing a limited selection of DVDs that seem to be perpetually checked out, showing two forms of ID to obtain a video store rental card, all before forgetting to return the movie in time and incurring exorbitant late fees) it took to rent a movie. Fortunately for the consumer, this process has been considerably streamlined, thanks to the introduction of several new ways to rent movies.

Unless you have been living under a rock, you have certainly heard about Netflix and its mail-order (and now limited web-streaming) rental business, which has been a huge success. However, what you may not know is that by using Redbox, you can rent new releases on the day they are released for only $1, all while picking up groceries, shopping at WalMart, or rolling through the McDonald’s drive-thru. (McDonald’s actually came up with the initial Redbox concept.) Each machine holds 700 discs with roughly 150 titles at a time, almost all of which were released in the last six months.

In 2008, Redbox was purchased from McDonald’s by Coinstar, who immediately expanded the business, bringing the total current number of kiosks nationwide up to nearly 18,000. In 2008, Redbox’s sales were up 180% from 2007, compared with a 9% drop for DVD sales nationwide during that same period. In addition, in the first half of this year alone, Redbox kiosks accumulated $343.6 million in DVD revenues, obliterating its earnings from the previous year. As brisk sales continue to roll in, both consumers and Coinstar seem thrilled about Redbox’s success. Only one problem–many of the movie studios are not happy!

While movie studios collect $17 per purchased disc (no matter how much your favorite DVD shop actually charges you) and receive about $1.50 per Blockbuster rental, according to Adams Media Research, if you use a Redbox to rent a flick, the studio only gets about 60 cents. It doesn’t take a rocket scientist to figure out why the studios have begun to rally against Redboxes. Chase Carey, president of Fox’s parent company, News Corp, recently stated in a conference call concerning Redbox that “having our movies rented at $1 is grossly undervaluing our products.”

All of this sums up why last year on August 26, Universal Studios representatives showed up at Redbox headquarters with a revenue-sharing agreement stipulating that Redbox would not rent Universal DVDs until 45 days after they went on sale. Because Redbox executives refused to sign, Universal then allegedly forced Redbox’s two distributors to stop selling Universal DVDs to Redbox. To get around the problem, employees went to popular retail stores to purchase copies of Universal DVDs on the day they were released in order to stock machines; however, these stores limited the Redbox employees’ purchases to five per DVD. Fox Studios has followed in Universal’s path, attempting to limit Redbox’s access to new releases in an attempt to curb the downward plunge of DVD sales.

Redbox has countered these strong-arm tactics by Universal and Fox by filing suit against both companies in the Delaware District Court, accusing the studios of violating antitrust laws by “attempting to prohibit timely consumer access to its new release DVDs at Redbox retail locations nationwide.” Redbox’s suit against Universal was filed last year and is due to come before a federal judge in the near future, and the suit against Fox was filed last month. Not all studios are unhappy with Redbox though, as evidenced by recent deals Redbox has struck with Sony pictures and Lions Gate Entertainment. Sony is receiving up to $460 million for the right to distribute the studio’s DVDs on their initial release date for the next five years, and Lions Gate Entertainment has also agreed to supply new releases to Redbox over the next five years for $158 million.

In my opinion, these distribution agreements represent another foolish move by a large, out-of-touch media corporation that ultimately will further alienate its client base in a time of falling demand. While the antitrust claims may prove to be hard for Redbox to win, it seems–based on the success of Redbox and its rapid kiosk growth–Universal and Fox will likely be forced to reach some sort of deal down the road if they have any hopes of keeping their consumers happy. If not though, I’m sure my girlfriend and I can wait an extra few weeks to catch Fox Studio’s recent dud, All About Steve. In fact, if Fox and Universal keep producing stinkers like this, one wonders if anyone will miss their presence in Redbox at all?